Taxes & Business

Capital gains

Also known asCapital gainRealized gain

Definition

Capital gains are the profits realized when a capital asset — such as stock, real estate, or a business interest — is sold for more than its adjusted cost basis. They are taxed as short-term (held one year or less, taxed at ordinary income rates) or long-term (held more than one year, taxed at preferential rates of 0%, 15%, or 20% depending on income).

By Olomon EditorialLast updated
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Key takeaways

  • Short-term gains (held ≤ 1 year) are taxed at ordinary income rates.
  • Long-term gains (held > 1 year) are taxed at 0%, 15%, or 20% depending on taxable income.
  • High-income taxpayers may also owe a 3.8% Net Investment Income Tax.
  • Cost basis tracking is essential — missing or wrong basis is one of the most expensive recordkeeping mistakes.

How Olomon thinks about this

Cost basis is one of the most under-managed numbers in a household's financial life. Olomon stores basis at the lot level for taxable holdings, surfaces holding-period status, and ties realized gains and losses to the documents that prove them — making capital-gains decisions defensible, not approximate.

Quick facts

  • Short-term holding period≤ 1 year (taxed as ordinary income)
  • Long-term holding period> 1 year
  • Long-term federal rates20260%, 15%, or 20% (income-based)
  • 0% bracket — single2026Taxable income up to $49,450[3]
  • 15% bracket — single2026$49,450 to $545,500[3]
  • Net Investment Income Tax20263.8% (above MAGI thresholds)
  • Annual ordinary-income offset cap$3,000 ($1,500 MFS)
  • Reporting formsSchedule D + Form 8949

In-depth definition

Capital-gains tax is one of the largest discretionary line items in many households' tax pictures — because the timing of sales, choice of lots, harvesting of losses, and use of strategies like 1031 or 1202 are all decisions you control. The starting point for every one of those decisions is accurate cost basis.[1]

Capital gains and losses are reported to the IRS on Schedule D and Form 8949[2]; only realized gains are taxable, and the holding-period clock determines whether they're taxed as short-term (ordinary income) or long-term (preferential rates).[1]

Formula

Capital Gain = Sale Price − Adjusted Cost Basis

Adjusted basis is your original purchase price plus capital improvements, less depreciation and certain adjustments. The gain is the difference between your net sale proceeds and that adjusted basis.

Frequently asked questions

  • More than one year. The IRS measures from the day after acquisition to the day of sale.

  • Capital losses first offset capital gains. Up to $3,000 of net loss can offset ordinary income each year ($1,500 if married filing separately); the rest carries forward.

Sources

Primary, authoritative references.

  1. 1

    Internal Revenue Service (IRS)

    Topic No. 409, Capital Gains and Losses

    Cited for: Authoritative IRS treatment

  2. 2

    Internal Revenue Service (IRS)

    About Schedule D (Form 1040)

    Cited for: Reporting capital gains and losses

  3. 3

    Internal Revenue Service (IRS)

    IRS releases tax inflation adjustments for tax year 2026

    Cited for: 2026 long-term capital gains brackets (Rev. Proc. 2025-32)

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Cite this page

APA
Olomon Editorial Team. (2026). Capital gains. Olomon Financial Glossary. https://olomon.com/financial-glossary/capital-gains

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